Weaker consumer confidence appears to be causing a more conservative approach to household finances

Some of us were rather horrified by the 2nd quarter Consumer Confidence Index reading of -15, the lowest level in this index since the 4th quarter of the year 2000, and representing a significant drop from the prior quarter’s reading . The magnitude of the drop could lead some to believe that the consumer currently experiences huge financial stress, and that a “crisis” is in the making. That’s not necessarily the case, but the Household Sector clearly has some concerns, and a more conservative spending approach is may be starting to take shape. That’s not altogether a bad thing at the current time.

Historically, sharp dips in the FNB-BER Consumer Confidence Index lead to some sort of slowing in Real Household Consumption Expenditure growth, or in more extreme cases to a real decline. Taking a look at previous dips, not every sharp historic Consumer Confidence drop was accompanied by a sharp drop in Real Consumption Expenditure. Admittedly some were, but in the year 2000, for instance, while the index was registering a big decline, Real Consumption Expenditure growth in that year was a solid 4.1%, driven by solid real income growth. In short, consumers often have concerns, which can weigh on their confidence, but they don’t necessarily “shut up shop” on a large scale unless the actual economic outcome is very weak.

In times of weakened consumer confidence, however, it is probably realistic to expect the Household Sector to take a more cautious approach to spending, and indeed, of late we may have been seeing early signs of this. Certain behavioural patterns in the Residential Property Market certainly point to this.

In our FNB Estate Agent Surveys, estimates of 1st time buyer levels as a percentage of total buying have receded in recent quarters. 1st time home buyers typically stay on the sidelines in tougher or more uncertain times, and this recent decline in the 1st time buyer percentage suggests that a portion of them are becoming more cautious as the economy slows and the SARB (Reserve Bank) continually warns of possible further interest rate hiking. The percentage of the typically more financially limited “single-status” home buyers has also declined in recent quarters. On the home selling side, we have also seen a noticeable decline in the percentage of sellers selling their homes in order to upgrade, suggesting more staying put for the time being. And the downscaling to smaller homes by those ageing home owners that no longer need their “large” homes, due to “life stage”, also smacks of greater financial conservatism.

It goes further. Amongst those sellers selling in order to downscale due to financial pressure, the estate agents believe that as of late a greater percentage will go the route of renting, on average the cheaper option to “buying down”.

Greater financial “conservatism can also arguably be witnessed in the very slow pace of Household Sector Credit growth. SARB monthly credit data put the year-on-year growth rate in total Household Sector Credit at 3.2% as at May and still slowing. And it isn’t solely due to mortgage credit weakness, but also due to non-mortgage, largely consumer-related, credit growth having slowed all the way from 24.1% at a stage of 2012 to 4.1% in May 2015.

Yes, certain or our own and other indicators point to signs of the emergence of a more conservative attitude amongst consumers, which would seem to be timed along with a recent deterioration in Consumer Confidence levels.

What could be the main concerns amongst households/consumers? Amongst these we would probably find:

– Wariness with regard to future interest rate hiking, with the SARB repeatedly warning very publicly of the need to “normalize” interest rates upward.

– A renewed rise in Consumer Price (CPI) Inflation following a temporary dip early in 2015 due to last year’s oil price drop.

– Rising tax and tariff rates, ranging from Personal tax increases to Municipal rates and utilities tariffs and in Gauteng the additional burden of Etolls. There is also regular speculation of further tax hikes, including the possibility of a VAT rate hike.

– Widespread publicity regarding an economy with major structural constraints and unable to grow significantly and create jobs. The economy is currently stuck in the 1-2% growth range. A notable structural constraint is that of electricity supply, felt directly by households through regular “load shedding”, and this may be a key driver of weakened sentiment.

In such conditions, a more conservative financial approach is arguably appropriate, and should be seen as desirable.

We would argue that it needs to, and may well do, go further until such time that the Household Sector Savings rate is significantly higher than the current level. The Household Sector Net Savings Rate, i.e.Gross Saving adjusted for the value of depreciation on fixed assets, is negative at -2.3% of Disposable Income. That’s is shocking. But more uncertain, and tougher, times can bring about an improvement in the savings rate. That would be a positive spin-off from weak consumer confidence. However, we suspect that this would be a mild improvement at best, unless the SARB ratchets up its interest rate levels significantly.

• Little indication of rising financial stress yet

To date, deteriorating consumer confidence doesn’t appear to imply rising financial stress. The TransUnion Consumer Credit Index continued its rising trend in the 1st quarter of this year, and at a level above 50 points to still-improving credit health. Transunion also indicted a -7.7% year-on-year decline in arrears levels in the 1st quarter, the 5th consecutive quarter of year-on-year decline.
StatsSA Insolvencies data, too, showed a -9.6% year-on-year decline in insolvencies in the 1st quarter.

Our own FNB Estate Agent Survey data regarding the estimated percentage of sellers “selling in order to downscale due to financial pressure” has risen very slightly, from a low of 11% at the end of 2014 to 13% in the 2nd quarter 2015 survey, but this is not yet a meaningful movement, and is still below the 14% average for 2014. It is also still far below the estimated 34% high reached at the peak of financial stress in the 2nd quarter of 2009.

Expectation of the resumption of interest rate hiking by the SARB in the near term could, however, raise the levels of financial stress. How bad it could get depends in part on the pace and magnitude of interest rate hiking. However, it also depends on just how well the Household Sector prepares for this event through its more conservative financial approach. Crucial is that the rate of credit growth remains slow, and that the Household Debt-to-Disposable Income ratio declines further from its most recent 78.4% level.

• Consumer Confidence deterioration can lead to an intensification in the “skills drain”, but no strong signs of that yet

It is possible that the Consumer Confidence deterioration can in part be due to concerns that relate to the longer term future of South Africa. This is especially true when weakness is driven by events such as power supply issues, or large-scale and sometimes violent events such as major industrial action. Weakening Consumer Confidence can then co-incide with an emigration surge.

Currently, one gets the feeling that “emigration talk” has become more common in an environment of rising social tensions and future political uncertainty.

In our FNB Estate Agent Survey estimates of the reasons for selling homes, an average percentage of 3.8% of total selling was estimated to be in order to emigrate. This represents a mild rise from a 2% low in the final quarter of 2013 following a prior declining trend from 2009 to 2013.

While this small rise in percentage hints at higher levels of emigration, it is probably too small an increase and too early to draw hard and fast conclusions.

But it is conceivable that the recent dip in Consumer Confidence can be accompanied by heightened levels of emigration.

This is the most damaging potential consequence of a drop in confidence levels amongst households. Working against the “brain drain” in recent years has been a mediocre global economy, which limits career opportunities for South African emigrants. In addition, extreme property values in some of the popular emigration destinations may be a limiting factor too

Conclusion

In short, at this stage of proceedings, we perceive a drop in Consumer Confidence to have brought about the start of a more conservative approach to household finances by a portion of the Household Sector. This is reflected in certain buying patterns in the residential market, including a decline in 1st time buyer and single buyer percentages, a drop in the level of upgrading to better homes and a rise in sellers downscaling due to life stage.

Such greater conservatism is to be welcomed. As yet, we don’t see any noticeable rise in financial stress levels, and the greater the caution now the less the stress could be at a later stage if and when interest rates do indeed rise further. Crucial is that household credit growth remains very slow, in order to bring down the Household debt-to-Disposable Income Ratio further, while we hope to see some improvement in the savings rate too.

But what one would not want to see are signs that this confidence drop is driving higher rates of emigration. This would be a key concern. The FNB Estate Agent Survey’s reasons for selling category hints at a slight rise in the percentage of sellers selling in order to emigrate. The rise is small to date, and the near-4% level remains low compared to a few years ago. But confidence levels need to turn for the better soon.